RAPID RESPONSES

We are all used to flare-ups of the sovereign debt crisis, but this time it is threatening to engulf the banking sector. Dexia brought back fears of 2008.

The problem is that the banks in the need of most state-help tend to be based in countries with troubled finances.

It is easy to see a vicious feed-back loop occurring whereby banks get in trouble because of the sovereign debt they hold on their balance sheets yet their national governments are too indebted to help them out.
Kathleen Brooks, Forex.com

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Financial fatigue

The last two months of market turmoil can be largely attributable to the inability of European policymakers to avert a potentially catastrophic sovereign debt and banking crisis.

Unfortunately for them their piecemeal approach, which included laughable banking stress tests, counterproductive austerity programs and bailouts, has now made the situation much worse in the longer term.

There is now a real risk that their inability to agree a swift solution is acting as a cancer in global financial markets with respect to risk appetite, choking off investment due to fear of a catastrophic default as the peripheral countries buckle under austerity fatigue, and countries like Germany, Finland, Holland and Austria count the cost with respect to bail out fatigue.